Much has been written about figuring out how much money will be needed in retirement, but much less about the fact that increasing life expectancies mean the probability of living with a disability in later years is growing. In some cases, retirees can find themselves locked into a retirement village contract that leaves them with insufficient funds to change where they live when their needs change. Last month, retirement and aged care provider Aveo announced they will now be providing three payment options: the current contract, “Aveo Way”, plus two alternatives – “Certainty” and “Essentials”. The options don’t change how much you pay upfront or what you pay while you live in the village. And for all three, there is a deferred management fee (DMF) of 35% (25% in new villages). Furthermore, there’s no sharing in capital gain (or loss), and the operator covers refurbishment costs and selling fees. So what’s different? Aveo Way and Essentials are all about how long you will live in the village and how quickly you want your money back when you leave. Certainty is about what happens if you choose to move from one village to another, or to a residential aged care facility – a transaction that often has people screaming about a “double DMF”. So what exactly is a double DMF? Let’s say you move into an Aveo village, paying $500,000 on entry. The value of that unit in five years’ time may be $550,000, but your exit entitlement is $325,000. If you move to an aged care facility that has a market price of $550,000, typically you would pay the $325,000 from the sale of your unit, and a daily payment at an annual interest rate of 5.96% on the $225,000 remaining, a cost of $13,410 a year. Many people cannot meet this cost from their cash flow, and so they choose to have their daily payment deducted from their lump sum. If you wanted instead to move from village A to village B it may not be possible unless you could dip into your investments for the additional $225,000. And if you did, some or all of that could be lost on exit. Under the original Aveo Way contract, the DMF is 35% after 3 years (25% in new villages), there is a 6-month move-in guarantee and a 6-month guaranteed buyback. Under the new Essentials contract the DMF is 35% after 5 years (25% in new villages), the move-in guarantee is shorter, at just 3 months, and the guaranteed buyback takes longer, at 12 months. Both of these leave you at risk of the double DMF scenario. Under the Certainty contract, the DMF, move-in guarantee and guaranteed buyback are all the same as the Aveo Way contract, but if you choose to leave the village to move to another Aveo village, one of their Freedom villages, or an Aveo Residential Aged Care Facility, you can swap your unit for a similar-priced unit, apartment or aged care bed without being charged again. Aveo’s Certainty option would enable you to pay the $325,000 for the $550,000 unit or aged care bed. It’s not free – the cost for this option is $2,000/year – but compared with the alternative cost this may be a bargain. The options are limited to Aveo-operated establishments, so if you want to leave Aveo to go to another operator the Certainty contract isn’t going to help you. But Aveo do have over 90 villages and residential aged care facilities in their portfolio, so there are potentially a lot of options. Aged Care Guru Rachel Lane suggests crunching the numbers on retirement villages, remembering to break it down into the ingoing, ongoing and outgoing costs - simply comparing what you pay upfront will ignore most of the key information. Seeking advice from a specialist adviser will ensure you understand the implications for your pension and potentially rent assistance too, your ability to fund your new lifestyle and what position you would be in if you needed to access home care or transition to residential aged care.

Ask Noel: Retirement village payment options explained

Aged Care Guru Rachel Lane suggests crunching the numbers on retirement villages, remembering to break it down into the ingoing, ongoing and outgoing costs - simply comparing what you pay upfront will ignore most of the key information.

Much has been written about figuring out how much money will be needed in retirement, but much less about the fact that increasing life expectancies mean the probability of living with a disability in later years is growing.

In some cases, retirees can find themselves locked into a retirement village contract that leaves them with insufficient funds to change where they live when their needs change.

Last month, retirement and aged care provider Aveo announced they will now be providing three payment options: the current contract, “Aveo Way”, plus two alternatives – “Certainty” and “Essentials”.

The options don’t change how much you pay upfront or what you pay while you live in the village. And for all three, there is a deferred management fee (DMF) of 35% (25% in new villages). Furthermore, there’s no sharing in capital gain (or loss), and the operator covers refurbishment costs and selling fees.

So what’s different? Aveo Way and Essentials are all about how long you will live in the village and how quickly you want your money back when you leave. Certainty is about what happens if you choose to move from one village to another, or to a residential aged care facility – a transaction that often has people screaming about a “double DMF”.

So what exactly is a double DMF?

Let’s say you move into an Aveo village, paying $500,000 on entry. The value of that unit in five years’ time may be $550,000, but your exit entitlement is $325,000.

If you move to an aged care facility that has a market price of $550,000, typically you would pay the $325,000 from the sale of your unit, and a daily payment at an annual interest rate of 5.96% on the $225,000 remaining, a cost of $13,410 a year. Many people cannot meet this cost from their cash flow, and so they choose to have their daily payment deducted from their lump sum.

If you wanted instead to move from village A to village B it may not be possible unless you could dip into your investments for the additional $225,000. And if you did, some or all of that could be lost on exit.

Under the original Aveo Way contract, the DMF is 35% after 3 years (25% in new villages), there is a 6-month move-in guarantee and a 6-month guaranteed buyback. Under the new Essentials contract the DMF is 35% after 5 years (25% in new villages), the move-in guarantee is shorter, at just 3 months, and the guaranteed buyback takes longer, at 12 months. Both of these leave you at risk of the double DMF scenario.

Under the Certainty contract, the DMF, move-in guarantee and guaranteed buyback are all the same as the Aveo Way contract, but if you choose to leave the village to move to another Aveo village, one of their Freedom villages, or an Aveo Residential Aged Care Facility, you can swap your unit for a similar-priced unit, apartment or aged care bed without being charged again.

Aveo’s Certainty option would enable you to pay the $325,000 for the $550,000 unit or aged care bed. It’s not free – the cost for this option is $2,000/year – but compared with the alternative cost this may be a bargain. The options are limited to Aveo-operated establishments, so if you want to leave Aveo to go to another operator the Certainty contract isn’t going to help you. But Aveo do have over 90 villages and residential aged care facilities in their portfolio, so there are potentially a lot of options.

Aged Care Guru Rachel Lane suggests crunching the numbers on retirement villages, remembering to break it down into the ingoing, ongoing and outgoing costs - simply comparing what you pay upfront will ignore most of the key information. Seeking advice from a specialist adviser will ensure you understand the implications for your pension and potentially rent assistance too, your ability to fund your new lifestyle and what position you would be in if you needed to access home care or transition to residential aged care.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au